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The DOJ and S&P: Payback for a downgrade?

We’ve long argued that the government should not endorse any company’s opinions about credit risk, which at the end of the day is all a credit rating is—an opinion. And for that reason the government will not have an easy time making a fraud case. …

So why wasn’t a federal case made in 2008 or 2009 or 2010 or 2011 or 2012? In the United States it has always been difficult to prosecute publishers of financial opinions for securities fraud. Yes, the SEC has sometimes successfully prosecuted the proprietors of sham newsletters that touted stocks with bogus claims while secretly accepting payments from the companies being hyped. …

There are other disturbing questions related to the timing and the target of this federal civil prosecution. S&P’s attorney Floyd Abrams tells us that “things seemed to rev up in terms of the intensity” of the federal investigation after S&P’s historic downgrade of United States credit following Washington’s debt-limit fight in 2011. …

Speaking of the debt-limit fight, that’s also coincidentally when White House Chief of Staff Jack Lew was aggressively promoting the President’s campaign to prevent entitlement reform. Mr. Lew had worked in the heart of Citigroup’s C +1.68% subprime investment factory, and the President has not only been willing to forgive and forget. He’s even nominated Mr. Lew to become Secretary of the Treasury. But the company that put a shot across the Beltway bow over deficit spending is now the only target of a credit-ratings prosecution.

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Attorney General (and later Supreme Court Justice) Robert Jackson once commented: “If the prosecutor is obliged to choose his cases, it follows he can choose his defendants…..“ Prosecutors could easily fall prey to the temptation of “picking the man and then searching the law books…. to pin some offense on him.” In short, prosecutors’ discretion to charge – or not to charge – individuals with crimes is a tremendous power, amplified by the huge number of laws on the books….

As Tim Wu recounted in 2007, a popular game in the U.S. Attorney’s office in the Southern District of New York was to name a famous person – Mother Teresa, or John Lennon -­ and decide how they could be prosecuted….:

The trick and the skill lay in finding the more obscure offenses that fit the character of the celebrity and carried the toughest sentences. The, result, however, was inevitable: “prison time….”

The result of overcriminalization is that prosecutors no longer need to wait for obvious signs of a crime. Instead of finding Professor Plum dead in the conservatory and launching an investigation, authorities can instead start an investigation of Colonel Mustard as soon as someone has suggested he is a shady character. And since, as Wu’s game illustrates, everyone is a criminal if prosecutors look hard enough, they’re guaranteed to find something eventually.

We saw the same thing with Sheldon Adelson after he decided to spend money to defeat Obama last year; all of a sudden he’s being investigated. And we had Obama, in 2009, wasn’t it, issuing veiled threats to sick the IRS on people who annoyed him.